In the business world, where big companies are taking center stage, let’s talk about something crucial – contracts. So, what’s a contract, you might wonder? Well, in simple terms, it’s a promise that the law has got your back on. Imagine it as a proposal – someone suggests something, and if the other person agrees, it turns into a solid promise. The one suggesting is the promisor, and the one accepting is the promisee. Now, the legal nitty-gritty of contracts in India falls under the Indian Contract Act, way back from 1872.
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According to this act, a contract is basically an “Agreement Enforceable by Law.” They also call it a “promise with a consideration,” meaning there’s something valuable involved. The Indian Contract Act breaks down the essentials of a contract, and one key element is ‘consideration.’ This fancy term, found in Section 2(d), boils down to the promise being willing to do something or refraining from it, all because the promisor suggested it. Intrigued? Keep reading for more on this fascinating concept!
Section 2(d) of the Indian Contract Act explains what “consideration” means in a way that’s like a fair exchange or a friendly deal. It says that if someone does something, refrains from doing something, or promises to do or not do something because someone else asked them to, that act, choice, or promise is the consideration for a promise. In simpler terms, it’s like a give-and-take situation, or as they say, “quid pro quo.” Scholars like Pollock describe consideration as the “price” for a promise, making it something you can hold someone accountable for.
Blackstone calls it the “recompense” or compensation one party gives to the other. In the case of Currie v. Misa, the judge, Lush J., says consideration can be something good like a benefit or profit, or it can be refraining from something or taking on a responsibility. To make it more relatable, think of it like when A agrees to sell their car to B for Rs. 50,000 – here, B promising to pay the money is what A gets in return for promising to sell the car. It’s like a friendly agreement where both sides give and receive something.
Essential Elements of Consideration
In order to be considered a valid consideration in the eyes of the law, it is important that a consideration meet certain essential elements. These essential elements have been explained below.
Consideration must proceed at the instance of the promisor
Imagine helping out a friend with their homework just because you wanted to be supportive, without them even asking for your assistance. Later, if you were to approach your friend asking for payment, it wouldn’t be considered a valid arrangement because your act was voluntary, not in response to their request. A similar situation arose in the case of Durga Prasad v. Baldeo (1879).
Durga Prasad constructed shops at his own expense after a collector’s order, expecting commission from the sales as promised by the occupiers. However, the court deemed the consideration invalid since the construction was not done at the request of the shopkeepers. The court emphasized that the key is not whether the promisor benefits directly, but that the act or abstinence is done at their desire. This principle was reinforced in the case of Kedarnath Bhattacharji v. Gorie Mahomed (1886).
Consideration may proceed from the promisee or any other person
In simpler terms, here’s the scoop: when it comes to sealing the deal in a contract, it doesn’t really matter who brings something to the table. Whether it’s the person making the promise or someone else, as long as there’s a little something called “consideration” in the mix, you’re good to go. So, if the one making the promise is cool with it, that consideration thing can be handed off to someone other than the person who got the promise in the first place.
Let me hit you with a story to drive this home. There was this case, Chinnaya v. Ramayya (sounds fancy, right?), where A passed on some property to her daughter. But here’s the twist – the daughter had to dish out an annuity to her brother, as per the gift deed instructions. All good so far, right? Well, the daughter changed her mind and didn’t stick to the plan.
The brother wasn’t having it and took the matter to court. The sister (defendant) tried to pull the “no consideration from the brother” card, saying he wasn’t part of the deal. But the court was like, “Nah, it’s chill. Consideration doesn’t have to come straight from the promisee.” So, the brother got the green light to keep fighting for his money. But here’s the kicker – in English law, this whole consideration switcheroo doesn’t fly. It’s a different ball game across the pond.
Consideration may be past, present, or future
The consideration of a contract may be an act or abstinence that has already been done at the desire of the promisor, is in progress or is promised to be done in the future. On this basis, consideration can be categorised as past, present, or future.
- Past Consideration:
- Imagine helping your neighbor paint their balcony without expecting anything in return. Later, your neighbor decides to show appreciation by paying you Rs. 1000. This act of compensation is an example of past consideration, where a promise is made for a voluntary action performed in the past.
- Past Voluntary Service:
- According to Section 25(2), if someone voluntarily does something for another, a promise to compensate them, either partially or wholly, is considered a valid and enforceable consideration. For instance, if someone saves another person’s life without any prior agreement, and later the saved individual decides to reward the rescuer, it falls under past voluntary service.
- Past Service at Request:
- While the law doesn’t explicitly cover this concept, it can include acts done at the request of another, with the promise of payment made subsequently. The Bombay High Court recognized this in Sindha Shri Ganpati Singhji v. Abraham, stating that services rendered to a minor at their request, continuing after they reach adulthood, constitute valid consideration for a promise to pay.
- Present or Executed Consideration:
- Executed consideration involves an act done in response to a promise. For example, if someone promises a reward for finding a lost item, the act of finding and returning the item is the executed consideration. It’s important to distinguish this from past consideration, as executed consideration involves an act done in response to a positive promise.
- Future or Executory Consideration:
- Think of a scenario where X promises to sell goods to Y at a later date, and in return, Y promises to make the payment after receiving the goods. This is an example of future or executory consideration, where both parties postpone their obligations to a later date. Each promise serves as consideration for the other, creating a mutual commitment that will be fulfilled in the future.
Consideration must be of some value
Imagine telling your friend, “Hey, if you fetch my brand new AirPods from my bag in the classroom two floors up, they’re all yours!” Sounds like a friendly deal, right? Well, here’s the twist: even though the words might fit the definition of a promise and an act, the law wants something more. It’s not just about what you and your friend see as valuable; the law also needs to recognize it. In a case called Chidamabara Iyer v. P.S. Renga Iyer (1966), the Supreme Court pointed out that consideration should be more than just a nod between buddies – it should be something both parties and the law can agree has real value.
- Value of Consideration:
- In a contract, both parties need to exchange something of value, known as consideration. It’s crucial that there is some value involved, but it doesn’t have to be precisely equal to the promise made.
- The court doesn’t determine what’s a fair or appropriate value for the consideration. Instead, it’s up to the parties involved to agree on this themselves.
- Inadequacy of Consideration:
- While the court doesn’t question the adequacy of consideration, it can consider if the value seems unfairly low.
- This comes into play when assessing whether the agreement was made with free and voluntary consent. If the court is convinced that there was no pressure or coercion, the contract stands, even if the consideration seems insufficient.
- Forbearance to Sue:
- If someone agrees not to take legal action against another party in exchange for a promise, it’s considered valuable consideration.
- For instance, if a wife has the right to sue her husband for support but chooses not to in return for a promised monthly allowance, the court recognizes this as valid consideration.
- However, it’s important to note that this only applies when the legal claim is immediately enforceable. Real forbearance requires a present right to sue.
In simpler terms, when making a deal, as long as both parties agree on what they’re getting in return and there’s no foul play involved, the court generally respects their choices, even if the value seems a bit off. If someone decides not to sue someone else based on a promise, that’s seen as a fair exchange in the eyes of the law, as long as the right to sue is valid at that moment.
Consideration must be real
The consideration must be real, as in, it should not be physically or legally impossible in nature. The consideration will also not be considered real if it comes with a level of uncertainty, because if consideration is not certain, it becomes impossible to carry it out. Given under are the instances when consideration will become unreal and hence void in the eyes of the law.
- Physical Impossibility: Imagine promising to do 300 pushups in 3 minutes for Rs. 10 lakh. That’s a physical impossibility and wouldn’t be considered valid in the eyes of the law because it’s just not doable.
- Legal Impossibility: If you promise to pay someone for doing something illegal, like offering money for a murder, that consideration is legally impossible. The law won’t recognize or support such agreements.
- Uncertain Consideration: Consideration must be clear and certain. For instance, if a cobbler quotes you a price range (Rs. 100 or Rs. 150) for replacing your shoe soles, it becomes uncertain. The law requires clarity in what exactly the consideration is.
- Illusionary Consideration: Ever heard someone promise to bring the moon and stars? Well, that’s a classic example of illusionary consideration. But in legal terms, promises of things that aren’t real don’t hold up in court.
- Consideration Involving Pre-existing Duty: When making an agreement, it’s not enough to promise something you’re already obligated to do. The law requires that the consideration goes beyond existing obligations. For example, promising extra payment to a government employee for simply doing their public duty is not considered a valid form of consideration.
Consideration must be lawful
The consideration must be legitimate in order for the agreement to stand. The following circumstances are prohibited by Section 23 of the Indian Contract Act from allowing consideration:
- When it involves a legally prohibited act, or
- When it harms another individual’s person or their property, or
- When the act is perceived to be immoral or against public policy.
Except in situations when the illegal part of the agreement can be separated from the legal part, the entire agreement will be void if any part of it is illegal.
Exceptions to Consideration
Section 25 of the Contract Act lays down a few exceptions when an agreement made without consideration is not void.
Exception 1: Natural Love and Affection
If you make a written and registered agreement based on genuine love and affection with your close family members, like those related by blood or marriage, it’s legally binding even if there’s no formal consideration involved. So, if you decide to help out a family member out of love and put it in writing, that agreement is enforceable.
Exception 2: Past Voluntary Service
If someone does something for you voluntarily, without expecting anything in return, and you promise to compensate them afterward, that promise is legally binding. The key here is that the service must have been done without your prior knowledge and willingly. For instance, if your friend finds your lost phone and returns it, and you promise to give them Rs. 100 later, that promise becomes a valid contract.
Exception 3: Time-barred Debt
Imagine you owe someone money, but the legal time limit to claim that debt has passed. If you still decide to acknowledge the debt in writing and promise to pay part of it, that promise is enforceable. For example, if you owe Rs. 1,000, but it’s too late for the creditor to legally claim the entire amount, and you sign a written promise to pay Rs. 500, that promise becomes a valid contract.
In essence, these exceptions recognize certain situations where promises without traditional consideration are still considered valid and enforceable under the law.
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